"Smart Reform" of Crop Insurance Could Help Trim Ag Budget

The U.S. Department of Agriculture is facing significant cuts in its spending on farm support. Bruce Babcock, professor of economics and director of the Center for Agricultural and Rural Development (CARD), has identified a specific cut in the crop insurance program that could actually improve how the program operates while saving money. Babcock has zeroed in on the "optional units" feature of crop insurance. Currently, farmers who grow a crop on more than one section of land can create a separate insurance unit--an "optional unit"--for the land in each section. Each optional unit stands alone when it comes time to calculate premiums and indemnities. An alternative to optional units is to insure a farmer's entire crop in a single insurance unit. The insurance guarantee on this single unit is exactly equal to the sum of the insurance guarantees on the optional units. However, the frequency of insurance payments would be lower on the single unit because production from all fields is pooled together when calculating whether there is a loss. This change could reduce the taxpayer costs of the program by as much as $330 million with no impact on the ability of the program to provide support to farmers when harvested yields or harvest time revenue falls short of the insurance guarantee. For more information, see the briefing paper "ARPA Subsidies, Unit Choice, and Reform of the U.S. Crop Insurance Program," available on the CARD Web site. Contact Bruce Babcock, (515) 294-6785, or Sandy Clarke, CARD communications, (515) 294-6257.

(Released March 2005)